ASK A BANKER: How To Deal With Medical Debt

I have a question about medical debt. My 36-year-old
sister just suffered a brain hemorrhage, collapsing at work and
sent to the hospital. I am happy to say that she is expected to
make a full recovery, but the treatment and ensuing hospital stay
involved a week in intensive care, a neurosurgical “procedure,”
numerous CT scans, and many, many medicines which she will take
for months, if not her entire life. Although she and her husband
have health insurance, they otherwise live on a very tight
budget, and we are afraid of the hospital bills that will result
from this incident.

We “heard” that health-care providers cannot bankrupt
people who are unable to pay. If they do the best they can to
cover the bills but simply fall short, which they most certainly
will, on both counts, does some entity absorb the debt that they
cannot pay? The government? The hospital? The insurance
companies?

I mean, what do they do if the family simply doesn’t have
the money to pay for the essential care she received?

Thank you, Concerned Sister (Alexandria, VA)

Dear Concerned,

I’m sorry to hear about your sister’s condition, and I hope she
continues to recover.

Your question is a really important one – as extraordinary
medical costs often bring on a financial calamity, following
directly on the heels of a health calamity.

I read in your question anguish over your sister’s health –
compounded by the anguish of financial insecurity for her even
after she achieves a full recovery.

A hospital/patient relationship, in my opinion, is distinct from
a business/customer relationship or banker/borrower relationship
in a way which should change the way debt gets treated.

By that I mean neither the hospital nor your sister had a choice
about the transaction. Your sister clearly didn’t choose to
get a brain hemorrhage and her choice of treatment – whether made
by her or her family – was made under considerable duress.
The hospital, for its part, cannot refuse to treat your sister’s
condition, despite its cost to the institution, or her likely
ability to pay. She has to have the treatment to survive –
given the consequences of not getting treated – and the hospital
has to treat her, regardless of the financial consequences.

In my business experience, and indeed in my basic world view,
refusing to pay a debt is akin to stealing. You received
something valuable. Reneging on payment means you took that
valuable thing without paying. This is hard-assed and
perhaps unpopular, but that’s my view. Don’t hate me, I’m
an ex-Banker.[1]

Medical debt stands out, however because of the absence of choice
between customer and provider.[2] Fortunately, most hospitals take this into
account and assume a certain amount of financial indigence in
their patient population. In other words, most hospitals
make a larger provision for non-payment of their bills than a
typical business. Traditionally, most hospitals have been
run by religious organizations, governments, or universities that
consciously blend a financial approach with an ethical
non-financial approach to providing service.[3]

This approach could mean good news for your sister and your
family, as the hospital should be prepared for many patients’
inability to pay their bills in full, including your sister’s.

Now, to return to your specific question of what can happen – and
what your family should do. It’s a myth that the hospital
can’t push your sister into bankruptcy.

Of course they can. Here’s the worst case scenario:

Let’s say she owes $50,000 to the hospital, and she ducks the
bill because, as you say, she doesn’t have the money to pay
it. The hospital will refer the bill to a collector, who
can initiate a letter and phone campaign to get her attention and
urge payments. Occasionally this campaign can threaten her
employment, and it certainly will put her through considerable
stress.

Following continued non-payment, the hospital may refer the bill
to a collection attorney, who may take a period of time to sue
her in court to obtain a judgment. With a judgment in hand,
the hospital can, in most states, garnish her wages[4], place a lien on her home[5], or haul her into a court for a debtor’s exam to
disclose her income and assets.

By the time (at least a year from now) that the hospital has
obtained a judgment, the amount due will have risen considerably
owing to penalties, interest, and lawyer’s fees.

With a court-ordered judgment, her credit will be wrecked so any
future borrowing will be either refused or offered at usurious
rates.

Needless to say this is a bad place to be in, and bankruptcy
could seem like an attractive option for your sister.

So what should your sister and your family do to avoid this?

Up front, you should make an accurate record of her income and
assets.

Ideally, for your short-term purpose, this record will show her
inability to settle her $50,000 medical debt.

Next, find the highest ranking person in the hospital’s accounts
receivable department and plead your sister’s case, offering to
pay something monthly that she can actually afford. If
that’s $100/month great, but if it’s only $25/month, so be it.

At a rate of $100/month ($1,200/year) that $50,000 medical debt
will never be paid in full. That’s ok. At some point,
a year or three from now, your sister can return to the hospital
receivables department and offer some lump sum amount ($5,000?)
based on her tax refund or house refinancing or ability to borrow
$5,000 from a bank. Chances are, at some point, the
hospital will welcome the partial settlement and offer debt
forgiveness on the remainder.

Not-for-profit hospitals, in particular, budget for non-payment
by many patients. Many may budget a particular amount of
non-payment per year, so forgiving the $45,000 your sister can’t
pay in 2013 may be impossible now since it exceeds their figure,
but may be possible later because of the budget in a new
calendar year.

As a finance professional who dealt with many non-paying debtors,
I was always receptive to minimal monthly payments from an
upfront debtor who made clear to me that non-payment and
bankruptcy represented a much worse, mutually-assured destruction
option. If the hospital accounts receivable department acts
rationally it will welcome some regular, low payments now rather
than engage in a collections fight with your sister that they’re
uncertain to get anything from in the future.

I hope that helps and good luck to your sister and your family.

[1] Of course we can all imagine scenarios in
which stealing may be ethically justified, such as a parent
attempting to provide food or basic shelter for their minor
children. The ethical imperative and human impulse to
survive trumps the ethical imperative to not steal in certain
circumstances. Yes, I just agreed to accompany my wife
to the movie version of Les Miserables. Jean
Valjean stole a piece of bread 19 years ago. That’s
fine, I forgive him.

[2] The exceptions being optional medical
procedures, such as elective plastic surgery. You had
better pay for those butt implants in full, or else I will
judge you harshly!

[3] It’s also why I have an instinctual aversion
to for-profit medical practice. Yes, there may be some
additional efficiencies to be gained from market practices,
but medical service is not like other services. In the
absence of a choice of whether or not to treat your broken
leg, or appendicitis, or brain hemorrhage, pure profit
motives can create ethical monstrosities.